Intraday trading can be described as trading that takes place in one day. It is self-explanatory. Open interest is one of the most important concepts that intraday traders must understand.
Open interest (OI) simply means the sum of all outstanding contract numbers at the close of each trading day. These are open positions, which are still to be closed. The open interest measure the market's overall activity. The open interest rises by one contract every time two parties (i.e. the buyer or the seller) create a new position. The open interest decreases by one contract if the traders close the position. The open interest is not affected if the seller or buyer sells their position to another buyer or seller.
If the OI is higher, it indicates that money is being injected into the market. If the OI falls, it indicates that the current price trend may be ending. The OI can be used to indicate price trends that are changing.
Open interest is not the same thing as volume, traders need to understand this. Volume is the number of contracts that are traded per day. Volume refers to the number of transactions that took place between buyer and seller, regardless of whether there has been a transaction or a new contract. OI and volume are different in that open interest refers to the number of open and active contracts, while volume refers to how many have been executed.
Price action is another parameter to be aware of when discussing OI. In trading terms, price action refers to the movement of the price of a security over time on a graph. It is the price trend for a security's upward or downward.
To analyze the market, traders often use volume to calculate OI and price. It is generally accepted that a market is strong if the price is rising and the volume is up. However, the market is weak if it has a falling price and the volume and OI are both rising. This chart will help you understand the rules of open interest and volume.
OI, in conclusion, is important because it indicates how many contracts are currently open or closed. OI rises when new contracts are added. The open interest drops when a contract has been squared off. Open interest is often referred to as volume. Volume indicates how many trades were executed on any given day. It does not carry over to the next day. OI on the other side has implications for the next day and is therefore live data.
Intraday traders can use open interest, price, and volume information to help them understand the market's position. This information gives intraday traders an indication of the bullishness or bearishness of the market.